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The Benefits and Risks to Buying Off-The-Plan

Whether you’re a seasoned investor, a first time home buyer, or just starting out on your property investment journey - buying off-the-plan (OTP) can be a wise move for Australians who find themselves on the market for new real estate. While there certainly are benefits to be enjoyed from an OTP purchase, like most things, there are a few factors to consider, including changes to government incentives and policies. This article is all about helping you make an informed decision about whether or not buying OTP is for you. 

 

What Is Off The Plan Anyway? 

Buying ‘off-the-plan’ means purchasing a property that hasn’t yet been built. This includes apartments, townhouses and house and land packages. While it may have design blueprints, interior and exterior architectural renders, and floor plans to its name, there is no physical building - yet. So, what is off-the plan? Think of it this way - you’re going ‘off the plans’ to know how the property will look once constructed, rather than an existing bricks-and-mortar home.

 

You’re not flying blind though. The developer responsible for the OTP property often has a display suite or beautiful videography where you can immerse yourself in a model of what the property will look like once completed. All this allows you to better experience and visualise just what you are buying. 

What Are The Benefits & Risks Of OTP? 

First Home Buyer Benefits

Cash Grants

You may have heard of the First Home Owner’s Grant (FHOG). In a nutshell, this government grant is designed to give first home buyers a leg up in a competitive market by providing financial assistance. Depending on which state or territory you intend to buy in, you could receive anywhere between $10,000-$30,000. Definitely, something to think about when asking yourself ‘Why buy off-the-plan?’. There are of course some restrictions around who can qualify for the grant and what type of properties are covered under the scheme. 

Luckily, OTP properties are fully covered. But with each state and territory throughout Australia setting their own rules and eligibility requirements around the FHOG, it’s a good idea to read up on your state’s criteria to see if you qualify. 

In NSW, for example, there is a price cap of $750,000 (land and house value) for OTP builds, meaning that the property will need to be valued at or below this amount if you are to be eligible for the grant. 

Save On Stamp Duty 

Regardless of where you live in Australia, all states and territories impose stamp duty (otherwise known as transfer duty). But, lucky for first home buyers, buying OTP can help you reduce your stamp duty, or even avoid paying it altogether. This is thanks to special concessions offered by state governments. But, just like the First Home Owner’s Grant, the rules and requirements around these stamp duty discounts differ between states and territories. 

NSW, for example, has named this type of concession the First Home Buyer Assistance Scheme (FHBAS). This entitles first home buyers to either a concessional rate or an outright exemption depending on how you meet the criteria. 

What are the criteria? If you buy a new home, such as an OTP build, that is valued under $800,000, you can apply for a full exemption. Otherwise you may still be able to apply for a concessional stamp duty rate if your OTP build is valued between $800,000 and $1 million. 

The other attractive perk of buying OTP is that you can actually defer paying stamp duty for up to 12 months after you sign the agreement, as opposed to the traditional 3 month period.

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Investor Benefits 

Capital Growth

Because an OTP build can take months or even over a year to reach completion, when the actual property is finally constructed, its value can end up being a fair bit more than the initial purchase price. This is because rising house prices and a booming property market can raise the value of your OTP build while it’s still in the construction phase.

For example, say you buy an OTP apartment for $500,000. Then,12 months later when the property is completed, it’s now worth $610,000 because the Aussie property market had an annual growth rate of 22% during the time of construction. 

Tax Concessions 

All buildings go through a natural process of wear and tear. As a result, the value of the property is gradually reduced - this is known as ‘depreciation’. The upside of this is that property investors can actually boost their bottom line by claiming back depreciation when it rolls around to tax time. This is done by offsetting your taxable income by how much your investment property has depreciated. 

Why this tax deduction is particularly beneficial for OTP builds is essentially because the newer the property, the more depreciation you’re entitled to claim. There are a couple different types of depreciation - capital works and depreciating assets - and  they are calculated separately. So, it’s best to take a closer look at how each of them work. 

 

Overall Benefits 

Pay Less On Your Deposit

Many mortgage lenders will ask for a 20% down payment for an existing home, however OTP properties usually only require a deposit of 10%, with the balance only due upon settlement. This of course means you have more time to save. 

Lower Purchase Price And Other Perks

Why buy off-the-plan? How about getting a bargain on your to-be property? Approach the developer early enough and you may be able to get a discounted purchase price as they try to boost sales and encourage interest in the project. So you could potentially end up paying less on your OTP build than you would for a property of a similar style. As well, developers may even offer incentives such as furniture packages, car-sharing schemes or  the choice between light and dark apartment finishes. Not to mention that you’ll have access to a greater selection of property, before most of it gets snapped up.

Save On Maintenance And Repairs

Leaky taps, faulty HVAC systems, damaged windows - all inevitable (and costly) parts of property repair and maintenance. But the great thing about buying OTP is that because it’s a brand new property, it will take some time before you have to worry about forking out cash on structural repairs and fixture maintenance. (Longer than if you were to buy an existing property, in all likelihood.)

 

The Risks

Drop In Property Value 

Just as an OTP build can appreciate in value and achieve capital growth during the construction phase, so too can it decrease in value. If property prices decline between the signing and settlement period your lender may not necessarily finance the full amount of the loan you previously agreed upon. 

 

Delays In Construction 

Delays can happen in the world of major developments, and off-the-plan builds are no exception. The risk here is that if your new property isn’t ready by the time you expected, home buyers may need to remain in their current accommodation for longer than planned, or source temporary accommodation, and investors may be missing out on weekly rental income. There is, however, the sunset clause. A proviso that if the OTP build is not completed by a certain date, the contract is voided and the deposit is returned. 

 

Poor Structural Integrity 

While it’s rare, some OTP builds can be of poor structural quality. The reasons behind structural shortfalls can be varied, from inexperienced developers to the simple inability to detect certain defects on inspection. Whichever way you look at it, these reports have certainly hammered home the importance of due diligence and extensive developer research in OTP purchases. 

At iBuyNew, our dedicated team of property experts work hard to protect you from just this scenario. We do the homework for you! Matching you with developers who are professional, reliable and not ones to cut corners. 

 

Failure To Complete The Project 

It can happen that, for one reason or another, the project just fails to get off the ground. Or, in an unforeseen turn of events, the developer goes into liquidation and the development never sees completion. In either case, you want to know exactly what the protocol is should this situation ever rear its ugly head. And especially, if you’ll get your deposit back. This is why it’s always important to carefully go over the terms of the contract to know what happens in this situation. 

To avoid these stressful situations altogether, you should make it your business to vet the developer you’re looking at - previous works, reputation and all. Our expert team of property professionals at iBU are here to help. We can guide you on your OTP property journey, offering unbiased advice to help you select a developer you know you can trust. 



Why Buy Off-The-Plan With iBuyNew?

Whether you’re a first home buyer, an experienced investor, or someone in between, there’s no denying that entering the property market has its challenges. From searching for OTP properties and checking the developer’s credentials, through to signing off on the terms of the contract and getting handed the keys to the front door - it’s an involved and time-consuming process. 

With iBuyNew’s professional off-the-plan property experts, you can save yourself the hassle by letting us do the work for you. We make it our business to help you find exactly what kind of OTP property you’re looking for and make sure to only pair you with a reputable developer to mitigate OTP risks for you as best we can. From here we negotiate the terms of the contract on your behalf, using our industry relationships and expertise to ensure you receive the best possible outcome. 

We’ll be by your side, guiding you through every step of the process, from pre-construction and construction, through to pre-settlement, right up until the day you receive the keys. 

 

Have more questions about buying an off-the-plan property? Get in touch with iBuyNew and speak to our team of experts on 1300 123 463 today.

Published on 28th of April 2022 by Jen Dickson
Jen Dickson
Jen Dickson

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